Budget 2016: How many milestones to be covered towards simplified, litigation free and predictable tax regime

Budget 2016: How many milestones to be covered towards simplified, litigation free and predictable tax regime

Budget 2016: Hopes are high that the Finance Minister, Arun Jaitley, will deliver a budget which rides on the positive headwinds being shown in the India economy, meets the key Government programs of Make in India, Smart Cities and at same time balance the fiscal deficit.

In order to boost REIT and InvIT there is need for removal of dividend distribution tax on special purpose vehicles in which the REIT and InvITs have invested. (Express Photo)

Budget 2016: Hopes are high that the Finance Minister, Arun Jaitley, will deliver a budget which rides on the positive headwinds being shown in the India economy, meets the key Government programs of Make in India, Smart Cities and at same time balance the fiscal deficit. It is also the endeavour of the Government to have certain, predictable and taxpayer-friendly tax regime with reduced litigation.

The Government’s objective in achieving the above has been put forth in the last few budgets through announcements of no retrospective taxation, reduction in corporate tax rate in four years to 25% coupled with administrative circulars in the year which has sought to reduce tax litigation. In order to meet the objective of reduced corporate tax rate it is expected that the Government will announce a plan of reducing the tax rate by 1.25% per year for next four years along with phasing out of incentives in a selective manner keeping only those that help meet the Government programs of Make in India (additional depreciation, R&D), housing for all by 2022 (affordable housing tax incentive) and renewable energy commitments under COP21 (accelerated depreciation and tax holiday for renewable energy sector).

The introduction of Income Computation and Disclosure Standards (ICDS) instead of simplifying tax laws has added to compliance burden of the taxpayer. For simplification and easy acceptability, it is imperative to have a deferment of ICDS for one year along with announcement on how to deal with interplay of impending Ind-AS (Indian Accounting Standards) with income tax laws.

The objective of committee headed by former Judge R.V. Easwar is to suggest measures to simplify income-tax provisions would be achieved by implementing them through the Finance Act. The first report of the Committee seeks to make amendments for reducing litigation such as treatment of stock trading gains of up to Rs 5 lakh as capital gains and not business income, rationalisation of provisions of section 14A, permission to make fresh claim during assessment proceedings, easing provisions for stay of disputed tax demand, no penalty in bona fide cases or where view is as per jurisprudence etc which should be announced in the Budget.

With regards to international tax, draft guidelines for determining residential status based on Place of Effective Management’ (‘POEM’) were issued in the latter part of the year, currently raises many uncertainties which need to be resolved so as to meet the Government objective of a certain and non-litigious tax regime. Accordingly the industry is expecting that POEM should be deferred by another year.

From a global standpoint, all G20 countries and OECD members are focussed on introducing Action Plans under Base Erosion and Profit Shifting regime (BEPS) in the respective tax regimes. India being a key participant of the BEPS discussion could look to implement some of the Action Plans relating to transfer pricing, country-by-country reporting (CBCR), possibility of rebooking at the concept of permanent establishment of thin capitalisation norms etc. However, changes should be introduced post consultation with industry and in a manner that does not disrupt business planning.

Some of the other expectations:

From the common man’s perpective to have re-alignment of tax slabs to benefit the middle class, reintroducing standard deduction and removal of multiple deductions for salaried employees plus to foster flow of savings for economic growth by reinstating deduction for investment in Long Term infrastructure bonds.

In order to boost REIT and InvIT there is need for removal of dividend distribution tax on special purpose vehicles in which the REIT and InvITs have invested.

Abolition of Minimum Alternative Tax and Dividend Distribution Tax on Special Economic Zone units is recommended.

Infrastructure companies seek modernisation or expansion of infrastructure facility to be treated as ‘new infrastructure facility’ for tax holiday purpose while manufacturing sector desires to have more businesses and states included for investment-linked incentives.

In line with the recommendations of the Committee headed by Mr. N.R. Narayan Murthy, introduction of securities transactions tax (‘STT’) regime for distributions from AIFs would be welcome to eliminate any withholding taxes, so that income from AIFs can be made tax free for investors.